As President Barack Obama embarks on his second term, he and many other global leaders hoping for economic recovery paid close attention to the recent speech given by British Prime Minister David Cameron about whether he would lead the UK out of the European Union. Europe is the largest trading partner with both the United States and China, so the continent’s recession and the restructuring of its basic institutions is no academic matter. What happens there affects the rest of the world.

Cameron's speech was disappointing for most, including no doubt the White House which had lobbied Cameron to maintain Britain's place at Europe's center. The pugnaciousness at the core of Cameron's position—"The UK should stay in the European Union, but we want to cherry pick the conditions"—poses an obvious problem. No union can survive if its members agree to terms in such an à la carte manner, and the speech resulted in negative reactions from most quarters, including many of Cameron's allies within Europe.

Yet David Cameron’s speech actually gave the European project a backhanded boost, in that it helps to clarify and even finalize Europe’s next steps. For those who had any doubts, Cameron’s speech made it all too clear that a two-speed Europe is a reality. With Cameron setting the United Kingdom on a trajectory toward a possible national referendum sometime in 2017 over ‘Brexit’—a British exit from the EU—the U.K.'s course now has been set into a holding pattern. Yet the rest of Europe can't wait. The European Union’s current institutions, while adequate for a loose confederation of member states, are inadequate for a monetary union. Those member states so inclined need to push forward judiciously with the federalizing process.

But what to do with member states like the United Kingdom that originally signed up for this project but now have doubts about whether they wish to move forward towards more federalism? Not every EU member state wants to be part of a single government, much less a monetary union, so unsurprisingly these tensions have cleaved Europe into a Eurozone core and a non-Eurozone periphery.

Is there really no alternative between "in" or "out?" Leaving aside the annoying aspects of Cameron's weak leadership that allowed himself to be backed into a corner by the reactionaries in the Conservative Party, that really is the crux of the issue. It seems reasonable that another tier of membership needs to be created that allows those states that are not in the monetary union to retain their confederated status, and that this status should be formalized. Fashioning a flexible, two-tier structure might also offer a model to the other parts of the world that are experimenting with a regional confederation and union, such as Africa, Asia and South America.

So what might such a structure look like in Europe?

A 17 (or so) member core—those currently using the euro—would be the likeliest entity to adopt some sort of federal structure, as the momentum of monetary union drives the need for a more streamlined political union. This more federalized entity—whether it's called a United States of Europe or some other name—would have its own set of laws, political institutions and tax policies. It would also institutionalize aid flowing from better off member states to the more struggling states—much like California, New York and Illinois today annually subsidize Mississippi, Alabama and Alaska—through an ongoing federal appropriations process.

This core would have merged their political economies and bound their destinies together in a way that would be fairly irreversible. Clearly, that is a big step, especially considering Europe's bitter history between current member states, still not that distant in the rearview mirror. Yet it seems to be happening anyway, baby step by baby step.

This Eurozone-based entity could co-exist with a more loosely confederated European Union of the current 27 member states. This structure would allow the EU to retain its present governance, with the European Commission continuing as the executive of the EU along with the European Parliament and the Council of Ministers. A two-speed structure would allow those who want to use the euro to forge ahead not only with a fiscal and monetary union but also with the political institutions that are necessary to properly regulate a monetary union and to maintain democratic legitimacy. And they could do this at a hastier speed, without being slowed down by reluctant foot-draggers, like Cameron and the U.K.

Meanwhile the EU would be able to retain its degree of confederation with much of its present structure intact, but operating under much less pressure to integrate more than its disparate members—like a David Cameron-led UK—are capable or willing. Just as important, this two-tiered structure should be constructed so there is the possibility of individual member states migrating from the EU into the Eurozone when it made sense.

There are historical precedents for such an inside-outside arrangement, such as the early British Commonwealth or even the current United Kingdom, where there is a core Great Britain and other “members” (like Northern Ireland and some islands) that are more loosely confederated. One of the best outcomes of this potential set-up? The Eurozone would be able to start with a clean slate, and could design the streamlined political and economic institutions that are necessary for a monetary union, unencumbered by reluctant members like the U.K. with a far different notion about what integration means.

From the time of Montesquieu and Madison, the theory of democratic governance has been grounded in noble values that unfortunately often conflict: separation of powers, authentic representation, transparency, accountability, and efficiency of policy outcomes. Economist Kenneth Arrow won a Nobel Prize for proving that a well-designed government could attain many of these values, but never all of them.

The problem with the current European Union political system and economy is that it leans so far toward an enshrinement of a hyper separation of powers that it has given too short shrift to the other values. The reasons for doing so are understandable—it is no small matter to require that these different European states further merge their destinies. But failing that, confusion and incoherence have been the result on a too-frequent basis, and will continue unless further steps are taken toward more federalism. Europe is halfway across the river and must decide whether to go forward or back. You can't stay in the middle of the river for very long.

It is important to understand that Europe today is in its own Articles of Confederation stage, entangled by many contradictions and tensions as it tries to fashion its union and decide how integrated it wants to be. This process will take many years, as it did for a young United States of America that fought a civil war over states’ rights and member states’ sovereignty 70 years after its founding.

Yet make no mistake, many of the critics of the European Union and its “democracy deficit” are scared to death that European governance actually might become more democratic, since that would confer greater legitimacy, and what they really want is for each European country to go back inside its own castle walls. Nevertheless, many of the criticisms advanced by skeptics like David Cameron essentially are correct, and those who want “more Europe” should respond in a way that makes European-level governance more democratic, representative, transparent, accountable, responsive, and effective.